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THE ULTIMATE FIELD GUIDE TO Understanding and improving your credit score
Table of
contents
3
What is credit?
6
The importance of credit
13
Credit reports
17
Credit scores
25
Establishing credit
30
Control your credit
37
Improve your credit score
42
Takeaways
What is credit? The Ultimate Field Guide: Understanding and Improving Your Credit Score 3
Borrow today, pay
back tomorrow
Credit is the ability to buy things today using
497M
borrowed funds and pay back the purchase over time.
Americans rely on credit—to the tune of trillions of
dollars—to pay for many of life’s big-ticket items,
ranging from cars to education to homes. In fact,
establishing and maintaining good credit could very
well determine what kind of home you live in, from the open credit card accounts in the United
ability to pass a landlord’s credit check requirement to States as of 2020.
securing a mortgage or home improvement loan. Source: Experian, November 2020
90%
of U.S. consumers have at
least one credit card account
listed on their credit report.
The average outstanding credit
card balance is $5,315.
Source: The Experian Consumer Credit Review, January 2021
The Ultimate Field Guide: Understanding and Improving Your Credit Score 4
Why your credit
score matters
When you apply for a loan or credit card, the
lender uses your credit score as a kind of
shortcut to estimating your creditworthiness—
in other words, how likely you are to repay a
loan. Think of it as an indicator of your financial
reputation. The higher your credit score, the
lower the predicted likelihood you’ll fail to pay
your debts. Higher scores can qualify you for
lower interest rates, reduced fees and more
appealing credit card bonus offers and rewards.
As part of their review, lenders consider your
credit history—your track record of handling
debt and paying your bills. For many lenders, Credit scores are based on
evidence of solid credit management experience
the contents of your credit
is a prerequisite for considering you as a
files at the national credit
borrower. So where do lenders look for this
evidence? Credit reports and credit scores.
bureaus—records of your
history of borrowing and
In this guide, we’ll point out the many repaying money.
connections between personal financial habits,
the credit reports that document them and the
credit scores that distill them down to a simple
(but hardly simplistic) three-digit number.
Ready?
Let’s go!
The Ultimate Field Guide: Understanding and Improving Your Credit Score 5
The
importance
of credit
The Ultimate Field Guide: Understanding and Improving Your Credit Score 6
Why it’s important to
understand credit
Your credit is basically your reputation around how you handle money. If you have a good
reputation, it can be a powerful tool to help you improve your lifestyle by allowing you to
buy things you might otherwise have to save for years to buy, including:
Home
In terms of dollar volume, mortgage loans are the largest component
of U.S. consumer debt by a wide margin. In the third quarter (Q3) of
2020, balances on U.S. mortgage loans totaled $10.3 trillion, up from
$9.6 trillion in 2019, according to Experian.
College education
In Q3 2020, the nation’s total outstanding student loan balance
increased to an all-time high of $1.57 trillion, up from $1.4 trillion
in 2019, according to Experian.
Car
Auto loan balances are the third-largest source of debt in the
U.S., having grown to a total of $1.35 trillion in Q3 2020, up from
$1.3 trillion in 2019, according to Experian data. This extended an
upward trend that began in 2012.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 7
The 4 types of credit
The types of credit differ in a few important ways, such as their repayment
schedules and the amount required for each payment.
Installment credit
With installment credit, a creditor loans you a specific amount of money, and
01 you agree to pay back that sum, plus interest, in a series of fixed payments, or
installments, over a set period of time. An auto loan where you make payments
of $300 each month for 48 months is an example of an installment loan. Home
mortgages and student loans are other examples of installment credit.
Revolving credit
With revolving credit, the lender permits you to borrow variable amounts up to a
maximum credit limit. You can use some or all of that amount to make purchases,
and then repay what you’ve borrowed in monthly payments of varying amounts.
Aside from a minimum payment requirement, you can carry outstanding balances 02
forward over one or more months (a process known as revolving the debt), but as
you do so, the debt typically accumulates interest charges. Most credit cards are a
form of revolving credit.
Charge cards
03
You make purchases with a charge card the same way you do with a
revolving credit card, but charge accounts require you to pay back whatever
you’ve borrowed in full each month, without carrying any balance forward.
In exchange, they spare you interest and finance charges.
Service credit
Your contracts with service providers are all credit arrangements. You receive
electricity, cellphone service, a gym membership, and so on, on the condition that
you will pay for them each month.
04
The Ultimate Field Guide: Understanding and Improving Your Credit Score 8
Why you need credit
Not everyone needs credit. But having good credit is helpful if
you plan to finance a major purchase—such as a car, college
tuition or a home—that you cannot pay for upfront in cash.
That describes the vast majority of Americans. Credit cards
can also help you afford items that you can’t cover in a single
cash payment (or that exceed the amount of cash you feel
comfortable carrying around). Credit cards offer convenience,
even for smaller purchases, and many of them also offer extra
protections for you as a buyer.
Extra protections:
• Money back guarantees on items that are lost or
damaged in shipping
• Extended warranties so that if something breaks,
you can have it replaced or get reimbursed
• Low-price guarantees that reimburse you for
the difference if an item you buy with the card is
advertised at a lower price
If you have good or exceptional credit
With a good, solid credit reputation, you can apply for
rewards credit cards that can provide even greater
advantages, such as cash back refunds based on a
percentage of your card purchases, credits toward airline
miles or hotel stays, or points that can be used to purchase
a variety of goods and services.
The importance of good credit also extends beyond
purchases. Potential employers, landlords and service
providers may use your credit information to help decide
whether to work with you.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 9
MYTH
If you have no need to borrow
money, your credit doesn’t matter.
TRUTH:
Credit checks are often required in connection with:
Employment Home or New accounts
screenings apartment rentals If a mobile carrier, cable company,
If an employer finds evidence If landlords and property utility or other service provider
of poor money management in managers find evidence of finds a history of spotty bill
your credit history, they could late or unpaid bills, they could payments, it could refuse to
decline to hire you, particularly if demand a larger security provide you its services, or charge
the position you seek is financial deposit from you, or refuse to you a hefty security deposit or
in nature or otherwise requires rent to you outright. higher fees before it’s willing to
responsible handling of money. accept you as a customer.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 10Know your rights
A federal regulation known as the Fair Credit Reporting Act guarantees your rights
when employers, landlords, service companies and, yes, even lenders use your credit
history to make decisions about whether to work with you or how much to charge you:
Businesses must have a “permissible purpose” under the law to access
01 your credit report, such as lenders checking your report as part of a loan
application review.
If a business decides to charge you higher fees, require extra deposits,
02 or decide against doing business with you based on information in your
credit history, they must explain why in writing.
03
If you believe information reflected in your credit history is
inaccurate, you have a right to dispute it.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 11What determines whether
credit is “good”?
Think of good credit as a reflection of lenders’ Lenders want borrowers who:
confidence in your ability and willingness to
pay back whatever money they lend you, plus • Have a history of making timely payments on
interest charges, on the schedule you agree to loans and other bills
when you accept the loan. • Are at low risk of payment default (in other
words, going 90 days or longer without making a
When deciding whether to accept a particular
payment on their debt)
borrower’s credit application, lenders analyze it
in terms of risk: They view borrowers who are • Have the means to pay back their loans
highly likely to repay loans as low risk, and those
who are less certain to pay back their debts as You’re in charge.
higher risk. Lenders differ in their tolerance Because your creditworthiness is based on your
for risk, and many design credit products for financial history, you’re in the driver’s seat. If
borrowers with specific risk profiles. And while you want great credit, you can have it—once you
they might disagree on precisely how to define understand how the process works.
it, all lenders agree that some applicants are too
risky to take on as borrowers. For starters, let’s consider your credit report.
So how do lenders determine how risky a
borrower is, and what do they look for in an
ideal borrower?
The Ultimate Field Guide: Understanding and Improving Your Credit Score 12Credit reports The Ultimate Field Guide: Understanding and Improving Your Credit Score 13
What is a credit report?
Your credit report summarizes your history of managing
debt and certain other financial obligations. Credit reports
are maintained by three national consumer credit bureaus
(Experian®, TransUnion® and Equifax®), which compile debt
and payment data reported voluntarily by lenders. They’re
comprised of:
• Total debt you have today
• Credit accounts you opened in the past
• Your history of repaying debts (on time, late or missed)
Sometimes credit reports may also include your history of
rent or utility payments, but the number of landlords and
utilities that report payment information to the credit bureaus
is very small.
Your credit report might surface issues such as:
• Loan defaults
• Car repossession
• Home foreclosure
• Bankruptcy filings
• Collections
The Ultimate Field Guide: Understanding and Improving Your Credit Score 14The 4 sections of a typical credit report
01
Personal information
Your name, date of birth, Social Security number, current and past addresses, and
current and past employers.
Accounts
Credit cards, mortgage loans, auto loans, student loans and all other credit accounts.
These entries include the total amount of each loan (or total borrowing limit for credit
cards); the outstanding balances on each account; and the number of monthly payments
made on each account (and whether those payments were on time or late). If any
02
accounts have been turned over to collections, they will be listed here as well.
Inquiries
03
Records of the names of companies that have requested your credit report in connection
with credit applications or other permissible purposes, and the dates those requests
were made. Inquiries remain on Experian credit reports for two years, but most credit
scoring systems don’t consider them after one year. Checking your own credit does not
affect your credit score.
Public records
Information about bankruptcies. A Chapter 7 bankruptcy will remain on your credit report for
10 years, and a Chapter 13 bankruptcy will stay for seven years. If there is no information of
this kind that’s applicable to you, this section may be omitted from your credit report.
04
Not in a credit report
• Race • Purchase history
• Ethnicity • Bank balances
• Marital status • Criminal records
• Income • Level of education
• Medical history
The Ultimate Field Guide: Understanding and Improving Your Credit Score 15Where does all this
information come from?
Lenders, collection agencies and other companies Experian also obtains bankruptcy filing information
you do business with voluntarily supply credit from public records.
history information to the national credit bureaus,
Creditors and other companies are not required by
Experian, TransUnion and Equifax. Other entities
law to report borrower data to the credit bureaus
and service providers, including landlords, may
every month, but most do anyway because it helps
also inform credit bureaus about bill payments
them make smart lending decisions.
(and whether they are timely or late). Additionally,
220M
Experian maintains credit reports for
more than 220 million credit-active
consumers in the U.S.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 16Credit scores The Ultimate Field Guide: Understanding and Improving Your Credit Score 17
What is a credit score?
In a nutshell Who can see it
A credit score is a three-digit number, most In the United States, access to credit scores—and
commonly ranging from 300 to 850, that lenders to the credit reports upon which they are based—is
use to help assess your creditworthiness. Higher subject to strict usage restrictions under federal
credit scores indicate that you are more likely to law. The Fair Credit Reporting Act limits access to
repay your loan (or credit card balance) on time and your credit reports to a small number of entities
as agreed. Put another way, higher scores indicate
and organizations, including lenders, insurance
lower risk that you’ll fail to repay your debts.
companies and landlords. With your permission,
employers conducting background checks can
Higher is better check your credit (though they can only see a limited
The higher your credit score, the more likely you version of your credit report, not your credit score).
are to receive favorable terms on a loan, such as
lower interest rates and higher dollar limits. That
can translate to significant savings over time,
especially on big-ticket purchases like a home,
where even a slight reduction in your interest
rate can translate to thousands of dollars over
the life of your mortgage. Higher credit scores
can also qualify you for the best deals on credit
cards and other personal loans.
How your credit score is used
Credit scores are widely used to make a first
determination of creditworthiness. Your credit is
also used to determine which loan terms (including
interest rates and fees) you’re offered via direct
mail, online offers and “instant approvals” at car
dealerships and retail outlets. Building a good credit
score can give you more borrowing options and
more affordable borrowing rates.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 18MYTH
Only people with ultra-high
incomes get exceptional
credit scores.
TRUTH:
Anyone who has managed their finances well can achieve a high score.
To develop a high credit score, it takes patience,
discipline and wise decision-making.
Some people mistakenly assume that the financial freedom, flexibility, low
interest and rich rewards you get with a high credit score are all reserved for
the super-wealthy. Not so. While a high income can make it easier to avoid late
bill payments and high card balances, wealth does not guarantee good financial
management habits. And those habits are the things that reveal themselves on
the credit reports that scores are derived from.
In fact, credit reports include no income information whatsoever. Credit scoring
systems likewise have no knowledge of your gender, ethnic background,
religion or marital status—so they can’t use (or misuse) that information when
quantifying your creditworthiness.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 19How to achieve a high
credit score
• Borrow only what you need, when you need it. How credit scores are calculated
• Pay your bills on time every month. Computer algorithms called credit scoring
• Keep your credit card balances below 30% of models assign credit scores using complex
your borrowing limit—and try to stay below statistical analyses that predict your likelihood
10% or pay off your balances in full each month of defaulting on your loans (i.e., being 90 days or
if you want to see the biggest improvement in more overdue on a payment). These models look
your FICO® Score. for combinations of data in your credit report that
historically have been associated with payment
• Stay consistent over the long haul. Your
defaults across large consumer populations—
score will tend to increase over time, as you
and assign scores based on their prevalence (or
demonstrate long-term financial discipline.
absence) in your credit history.
There are hundreds of different credit scoring
What a good credit score won’t do for you models available to lenders. Each differs
Even a “perfect” FICO Score of 850 won’t qualify somewhat in the way it calculates your score, and
you for a loan you can’t possibly afford. Before the specific math each one uses is kept secret for
you can finance a personal jet, for instance, competitive purposes—and to prevent tampering
your lender will want to see evidence of income, or gaming the system.
savings or other assets you can tap to make
the monthly payments. While that cost might
exceed the grasp of middle-class households, an
exceptional credit score does not.
A great credit score is possible for anyone, and
having one makes it easier and more affordable
to finance purchases within your means, no
matter what income bracket you fall into.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 20What the numbers mean
Lenders have access to hundreds of credit instant in time, you’d almost certainly see different
scoring tools, including some they build and scores from each, even among those that share a
use themselves. Some are custom-designed for score range of 300 to 850.
particular industries, such as auto financing or
So while you may see different scores in different
credit card lending, while others are considered
places, federal law requires certain actions when
“generic,” and applicable to a wide range of
those scores are used in credit decisions. For
lending applications.
example, if a lender tells you that they turned
Generic scoring models all calculate scores based down your loan request or notifies you they’re
on the contents of your credit report from one charging an interest rate higher than the best one
of the three national credit bureaus. Each model they offer, the law requires them to include a list
differs at least slightly in the way it calculates of top factors—called risk factors—lowering your
scores, and some also differ significantly in the credit score. These can help you focus your efforts
ranges of possible scores they generate. For when trying to improve your credit score.
instance, the FICO Scores used by most lenders in
the U.S. range from 300 to 850, and the competing
VantageScore® 3.0 and 4.0 models produce
scores in that same range.
By contrast, the original VantageScore models
1.0 and 2.0 generated scores in the range of 501
to 990. If you could apply different models to
the contents of your credit report at the same
300-850
The FICO Score range used by most lenders in the U.S.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 215 factors determining your credit score
Payment history
01 A history of paying bills on time helps your credit score, while late or missed payments
tend to lower it. Payment history is the single biggest scoring factor, accounting for as
much as 35% of your FICO Score.
Credit utilization
Credit utilization is the amount of available credit you’re using. To determine your credit
utilization ratio, add up your outstanding balances on revolving credit accounts (such as
credit cards) and divide that by the sum of the credit limits on those accounts. Then multiply
by 100 to get your utilization percentage. If you owe $2,500 on your credit cards with a total
credit limit of $10,000 your credit utilization rate is 25%. Your credit score will suffer as you
“max out” your credit limit by pushing utilization on any one card, or in total, toward 100%.
02
Experts recommend keeping your utilization ratio below 30% to avoid a substantial and rapid
decrease in your credit scores. For the highest credit scores, you should aim to keep your
utilization below 10%. Amounts owed on your accounts is responsible for about 30% of your
FICO Score.
Length of credit history
03
Your credit scores will tend to rise over time as you gain experience handling debt.
If you’ve only been using credit for a few months or years, you can’t do anything to
accelerate that, but establishing a record of timely payments early on in life will help you
benefit as much as possible as your history stretches on. Length of credit history can
constitute up to 15% of your FICO Score.
Credit mix
Credit scores reflect the total amount of outstanding debt you have and the types of credit
you use. A variety of loans, including both installment loans and revolving credit,
can lead to higher FICO Scores. Credit mix can influence up to 10% of your FICO Score.
04
Recent applications
When you apply for a loan or credit card, you trigger a process known as a hard inquiry, in
05
which the lender requests your credit history (and often your credit report as well). Hard
inquiries typically can have a small, short-term negative effect on your credit score. As long
as you continue to pay your bills on time, your credit score typically will rebound quickly
from the effects of hard inquiries. (Checking your own credit is a soft inquiry and does not
impact your credit score.) Recent credit applications can account for up to 10% of your FICO
Score, but they are never the sole reason an application is declined.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 22How negative information
impacts your score
Certain negative entries in your credit report’s payment history can severely lower credit
scores for extended periods of time, depending on the nature of the information. The score
impact of these negative entries diminishes over time but, initially at least, they can outweigh
all other factors and severely drive down your credit score. These derogatory entries include:
Settled accounts Foreclosure
A creditor may agree to accept less Equivalent to repossession on a home
than the total amount you owe, in which loan, foreclosure occurs when a lender
case your debt is considered settled. takes possession of your house because
However, because you didn’t repay the you haven’t paid your mortgage.
debt as agreed, settled accounts are still Foreclosures stay on credit reports
considered negative. for seven years.
Collection accounts Voluntary surrender
When a creditor feels they can no longer If you are unable to pay an auto loan,
recoup a debt, they may hire a collection and negotiate to turn the vehicle over
agency to try to get you to pay. Or, to the lender, your account will note
they may sell the debt outright to a the voluntary surrender on your credit
collection agency. report.
Repossession Bankruptcy
When a creditor reclaims collateral When you’re no longer able to manage
for a secured loan, such as the vehicle all your debt, you may declare
you purchased with an auto loan, this bankruptcy. When you file Chapter 7
account status will be noted on your bankruptcy, none of the debt included in
credit reports. the filing gets repaid, and notation of the
bankruptcy stays on your credit report
for 10 years. If you file Chapter 13, you
Charge-offs repay a portion of the total debt you owe,
When a creditor charges off a debt, it and the information cycles off your credit
means they’ve decided they won’t be able report in seven years.
to get the money you owe, and they’ve
written off your account as a loss. They
may then sell debt to a collection agency.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 23What is a good credit score?
When tracking your credit scores and looking for evidence of improvement, it’s important to be sure
you’re using scores generated by the same model. With that in mind, here’s how FICO breaks down
the meaning of scores generated using the scale range of 300 to 850. Their five score ranges:
300 POOR
850
EXCEPTIONAL
Poor: 300-579 Good: 670-739
FICO Scores that range from 300 to 579 are FICO Scores in the range of 670 to 739 are rated “good.”
categorized as “poor.” Many lenders decline credit This range includes the average U.S. credit score (710 at
applications from people with scores in this range. the time of this writing), and lenders view consumers with
Credit card applicants with scores in this range may scores in this range as “acceptable” borrowers. People with
only qualify for secured cards that require placing scores in this range are likely to qualify for a broad array of
a cash deposit equal to the card’s spending limit. loans and credit cards, but are likely to be charged interest
Utilities may require customers with scores in this rates somewhat higher than the best available.
range to put down sizable security deposits. A credit
score this low could be the result of bankruptcy or
Very good: 740-799
other major credit problems, or may simply mean
FICO Scores in the 740 to 799 range are deemed “very
you don’t have much of a credit history for scoring
good.” FICO Scores in this range are above the average
models to base your score on.
credit score. Individuals with scores in this range may
qualify for better interest rates from lenders.
Fair: 580-669
FICO Scores that range from 580 to 669 are Exceptional: 800-850
considered “fair.” Scores in this range fall below the FICO Scores ranging from 800 to 850 are considered
average credit score, and lenders may disqualify their “exceptional.” They are well above the average credit score,
applications for mainstream loans. Individuals with and people with scores in this range typically experience
scores in this range may be considered subprime easy approval processes when applying for new credit.
borrowers, eligible only for loans with interest rates They are likely to be offered the best-available lending
significantly higher than the best available. terms, including the lowest interest rates and fees.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 24Establishing
credit
The Ultimate Field Guide: Understanding and Improving Your Credit Score 254 ways to establish credit if you have no credit
As long as you maintain good credit habits—paying your bills on time and avoiding excessive use of credit
cards and other revolving credit—your credit is likely to improve over the course of your life. But everyone
has to start somewhere and, unfortunately, that creates a problem. If you don’t have a credit history or any
data to draw from, lenders might be hesitant to lend you the money. But you’ll never establish your credit if
they won’t give you a chance to prove your creditworthiness. Here’s what you can do:
Become an authorized user on an established credit user’s account.
01
A parent requesting a card for use by their child can help the youngster establish a
credit history. The primary cardholder will be ultimately responsible for payments, so
be sure they have a positive payment history—and discuss whether you can use the
card and how your payments will be handled.
Open a new credit account jointly with an established credit user.
02
If you’re over 18, a parent, spouse or friend can apply for credit jointly with you. The loan
or credit card account will be listed in both of your names, and usage and payment activity
will appear on both cosigners credit reports. A word of warning, however: Both parties’
credit will suffer if the card is misused. Also, some card issuers don’t offer this option.
Obtain a secured credit card.
With a secured card, the borrower puts down a cash deposit equal to the spending
03 limit on the card. Purchases and payments will be reported to the credit bureaus and
can help establish a credit history. If payments are made on time and balances stay
low, secured cards can be an excellent way to build credit.
Get a credit-builder loan.
This special type of loan, available mainly from credit unions and small banks, is designed
to promote savings and help you establish or rebuild a positive payment history. Instead
04
of giving you the borrowed sum to use, the lender places it in a savings account that you
cannot touch. As long as you make payments on time, when you’ve repaid the loan in full,
the borrowed sum is released to you, possibly including interest. All the while, your loan
payments are reported to the national credit bureaus, helping you establish a positive credit
history. (If you miss payments, that will reflect negatively on your credit, and the lender can
take back the funds from the savings account to settle the loan.) When researching credit-
builder loans, make sure the provider reports payments to the credit bureaus.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 26How marriage and divorce
can impact your credit
While marital status is not reflected in your credit spouse to pay a joint loan, failure to do so will hurt
reports or scores, the credit activity of one spouse both parties’ credit histories as long as the loan
can have consequences for both, even if it occurred remains in both names.)
before the marriage. When married couples apply
If possible, it’s often wise for divorcing couples to
jointly for a mortgage, car loan or other credit,
refinance joint loans as individual debts. It’s also
as they must if they want two incomes taken into
crucial, especially after long marriages end, for
consideration, both parties’ credit histories are also
both parties to begin building up their individual
taken into account. If one has a low credit score
credit profiles. (Maintaining credit cards and other
or a spotty history, that could translate to a higher
loans in one’s own name during the marriage can
interest rate, or even difficulty securing a loan at
make this process easier.) But because divorced
all. And when a couple has joint credit, both parties’
individuals typically come to the loan application
credit reports and credit scores are affected by
process with less income than they could declare
payment activity (or lack of it) on those accounts:
as part of a couple, securing new loans may be
If one spouse maxes out a joint credit card, for
difficult soon after divorce.
instance, it hurts both spouses’ credit scores.
As a prelude to marriage, it’s a good idea for
couples to have a frank discussion of their credit
histories—and even share their credit reports with
one another—to avoid surprises, and perhaps to
start a conversation about avoiding the repetition
of past financial missteps after tying the knot. Keep
in mind that marriage does not combine a couple’s
credit reports; both spouses will continue to have
their own individual reports once they are married.
When a couple that has joint debts decides to split
up, it’s critical for both parties to make sure bills
continue to be paid as agreed during and after
divorce proceedings. (Even if a judge orders one
The Ultimate Field Guide: Understanding and Improving Your Credit Score 27How retirement can influence your credit As retirement approaches, individuals’ debt levels often taper off—mortgages may be paid off, cars may get replaced less frequently and credit cards may be used less often. A lack of credit activity over many months can cause an account to be dropped from score calculations, possibly hurting credit scores. It may also cause a credit card issuer to close your account, which could cause your credit score to decrease to less available credit. Retirement can also affect your ability to get loans since lenders often look for steady income when considering applications. Because retirement often brings a reduction in income, it may affect your ability to qualify for certain types of loans. The significance of a smaller income is its role in increasing your debt-to-income ratio (DTI). Lenders often consider DTI, which you can calculate by dividing your monthly bill payments by your monthly income—along with credit score, employment history and other assets you may have—when deciding whether to lend you money. A drop in income will typically mean an increase in DTI. Lenders typically look for DTI ratios below 43% when considering loan applications, though some may require lower ratios. No matter what your financial picture may be, you can take control of your credit behaviors and manage them successfully through all of life’s ups and downs. The Ultimate Field Guide: Understanding and Improving Your Credit Score 28
MYTH
Carrying credit card
balances each month helps
improve your credit score.
TRUTH:
Paying off your card balances in full as quickly as you can will save you
money, and could benefit your credit score.
“No pain, no gain” may be a truism for gym workouts and marathon training, but it’s
misapplied when it comes to building credit scores.
Carrying an outstanding credit card balance typically induces financial pain, in the form
of interest charges that get tacked onto your balance (which can accumulate quickly
over time, depending on the size of that balance). That discomfort yields absolutely no
benefit for your credit scores.
In fact, if your outstanding balance exceeds about 30% of the spending limit on your
card, or if the total amount you have outstanding on all your cards exceeds about 30%
of the sum of all the cards’ spending limits, your score could fall sharply. If you’re
carrying a balance because you can’t or choose not to pay off a purchase right away, try
to keep your balance under 10% of your credit limit.
Part of the convenience of credit cards is the flexibility to take more than one month
to pay off purchases, so it may not be possible to pay every card balance in full each
month. But never forget that you’re paying for that convenience in interest charges. And
while you may not be hurting your credit score by doing so, don’t make the mistake of
thinking you’re helping it.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 29Control
your credit
The Ultimate Field Guide: Understanding and Improving Your Credit Score 306 ways to take control of your credit
Once you understand the factors that influence your credit scores, your choices can help improve
your credit scores. Aim to do the following:
Pay all your bills on time, every time.
01 Positive payment history is the top factor many credit scoring models use to
determine credit scores.
Pay down your credit card debt.
This will help improve your credit utilization ratio, and the lower you can get it, the better.
People with the highest scores keep utilization levels under 10%.
Note that paying off your balance in full each month does not negate the impact of utilization.
If you have a $5,000 credit limit and run up $1,000 in credit card charges every month, you
may show a 20% utilization ratio even if you pay off those charges in full every month. The
credit utilization ratio on your individual cards plays a role too. You can be strategic about this
by making larger payments on cards that are near their spending limits. 02
Get credit for timely utility and cellphone payments.
Experian Boost™, a free service, could help you improve your FICO Score based
03 on your Experian credit report by factoring in your history of utility, cellphone and
streaming service payments. To enroll, you connect your bank accounts so Boost
can identify qualifying payments and add them to your Experian credit file. Once
that’s done, an updated FICO Score will be delivered immediately.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 316 ways to take control of your credit (continued)
Keep unused credit cards open.
Keeping unused credit cards open—as long as they’re not costing you a lot of money in
annual fees—is a smart strategy, because closing an account may increase your credit
utilization ratio. If you have an outstanding balance on any credit card, closing an unused
card account will increase your utilization. Also, keeping an account active by using your
04
card to make small purchases regularly and pay them off right away can help scores.
Check for fraud or inaccuracies on your credit reports.
Incorrect information or fraudulent accounts appearing on your credit reports can
05 drag down your credit scores. You should check your credit reports at all three credit
reporting bureaus (Experian, TransUnion and Equifax) for any inaccuracies. Verify that
accounts listed on your reports are correct. If you see something you believe to be an
error, submit a dispute to have the information corrected right away.
Apply for new credit only when you really need it.
This can help you prevent or at least minimize the slight credit score ding that sometimes
accompanies a hard inquiry.
06
Understanding that borrowers tend to shop around for the best credit terms they can get,
leading credit scoring models treat multiple credit applications placed within a short time
(14 to 45 days for FICO) as a single event. So if you’re seeking a car loan or mortgage,
for example, it’s a good idea to apply to multiple lenders in an effort to get the lowest
interest rate you qualify for. Your credit score will likely take a temporary hit, but won’t be
any worse than if you’d applied to just one lender—and you’ll likely have more than one
interest rate or fee structure to choose from.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 32Check your credit
report regularly
It is a good idea to review your credit report from each of the credit bureaus at least once
a year, if not more frequently. Set a calendar reminder to obtain your reports on a regular
basis. It’s also wise to check your credit report at least three to six months before you plan
to seek a large loan, such as a mortgage, auto loan or private student loan. This can help
prevent unpleasant surprises when it’s time to apply and give you some lead time to correct
any errors. Free credit monitoring from Experian can help you spot credit issues early on
and address them quickly. And remember: Checking your own credit report will never hurt
your scores.
You can get your free credit report directly Make sure your personal information is accurate.
Missing employer information from a previous job,
from Experian. In addition, you can get one
for example, isn’t a big deal, but an address you
report every 12 months for free from each don’t recognize could be a sign of identity theft and
of the three national credit bureaus if you should be addressed.
visit AnnualCreditReport.com—though
Be sure you recognize all the accounts listed
through April 2022, you can receive a free
on your report. If you see any unfamiliar loan or
report once a week. credit card accounts, get in touch with the lender
immediately to find out what is happening with the
You can also get a free report if you’ve account. Unauthorized accounts in your name could
recently been turned down for credit, also be the result of fraud. Keep in mind that some
employment or insurance for credit- accounts, such as a retail credit card account, may
be listed on your credit report under the name of the
related reasons. The company that
financial institution that owns the account.
turned you down should provide contact
information of the credit bureau that Make sure your credit accounts show the correct
amount owed and status. Bear in mind that your
supplied them your credit file. You can
most recent payments may not yet be reflected
then contact that bureau within 60 days in your credit file. Check for closed accounts that
to obtain your free credit report. are still listed as open, inaccurate balances and
payments incorrectly marked as late. Such errors
are rare, but if you see one, you should initiate a
dispute through the credit bureaus.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 33The right way to track
your credit score
Once you’re confident your credit reports are in The various credit scoring models all consider your
order, you can begin tracking the effects your credit factors at least slightly differently, and none
smart credit behaviors have on your credit scores. of them are guaranteed to be identical to the score
a lender will see when it considers your application
You can get your FICO Score 8 and additional
for credit. But all of these scores will tend to increase
scores lenders commonly use to assess your
as you adopt the smart credit behaviors outlined
creditworthiness directly from Experian.
above, so you can use any or all of them to mark your
VantageScore credit scores are available for free
progress as you work toward better credit scores.
through several banks, credit card providers and
Here are some guidelines for doing so:
personal finance companies.
• Be consistent about using the same score for
comparison purposes month to month. You can’t
meaningfully compare last month’s FICO Score
to this month’s VantageScore, for instance.
• Don’t worry if your score fluctuates from time to
time. This is normal and is usually the result of
changing account balances, applications for new
credit or outdated information being removed.
• Keep your eye on long-term trends. Don’t obsess
over your credit score by checking it several
times a week. Many score-reporting tools
only update once a month, and checking more
frequently than that isn’t necessarily productive.
Instead, focus on sticking to good credit habits.
Once you’ve made them second-nature, your
credit score should rise in time.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 34What to do if your
score is low
If you’re working to build on a poor credit score (for example, a FICO Score of 579
or lower), there’s a good chance your credit report contains some serious negative
entries, such as a foreclosure, bankruptcies or collections. You may also be swamped
in debt and unable to make all your monthly payments.
If that sounds familiar, don’t lose hope. You have options that can help you get your
credit score moving in the right direction:
Consult a certified credit counselor
Consider meeting with a credit counselor at a nonprofit certified
credit counseling agency. Counselors are trained to help people in
your situation, and can help you work out a game plan for improving
your credit.
Consider a debt management plan (DMP)
If you’re having trouble repaying your loans and credit cards, a debt
management plan could bring some relief. This process involves
working with a nonprofit credit counseling agency to devise a
manageable repayment schedule that will hopefully enable you to
get your finances in order. A DMP can indirectly lower your credit
scores, but they can rebound from it more quickly than they would
from a possible alternative—bankruptcy.
No matter your starting point, taking control of your credit habits can bring steady
credit score improvements. If your score is already good, you may be able to make
it great in the space of several months. If your score is very low, the trek to an
outstanding score may take some time. In the next chapter, we’ll look at why the
effort is worth it either way.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 35MYTH
Credit repair services
can raise scores quickly.
TRUTH:
There are no quick fixes for credit scores.
When people feel the need to turn things around in terms of their credit, they often want
immediate results. But while recovery is on the table no matter your credit score, the process
requires patience as well as discipline. When building up credit scores, you’ll need to think
about the changes you can make over the course of months or even years if bankruptcy and
foreclosure is in your credit history.
But there are no quick solutions. If a “credit repair” organization offers to help you “fix” your
credit for a fee, be very careful.
So-called credit repair companies typically charge fees you could put to better use paying
your debts, and they often advise you to stop paying your bills and instead put money in an
account they control (and charge you to maintain). This fund essentially provides money the
repair company will offer your creditors as settlement for your debts—but creditors are under
no obligation to accept such settlements, and your credit can be severely damaged if you stop
making payments on your debts. Even if all payments are made on time, a settled account
is considered negative because the full debt amount was not paid as agreed. Credit repair
companies can’t do anything for you that you can’t do yourself for free.
If you feel like you need assistance navigating the credit-rebuilding process, steer clear
of credit repair companies, and instead look for a nonprofit certified credit counselor. The
National Foundation for Credit Counseling can help you find assistance in your area. Credit
counselors can help you work out a credit-rebuilding plan that works for you—without further
depleting your bank account.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 36Improve your
credit score
The Ultimate Field Guide: Understanding and Improving Your Credit Score 377 awesome benefits of a great credit score
Let’s say all of your hard work, discipline and patience pays off. Having a FICO
Score high in the very good range (upper 700s) or exceptional range (800 or
higher) can help you save money over time and make you more likely to qualify
for the credit you want when you need it. Benefits include:
Access to a wide range of loan products
01 With higher credit scores, you’ll be able to access enticing credit
card offers and will have plenty of options when you apply for
mortgages or car loans.
Higher borrowing limits
Achieving an outstanding credit score (and adopting the healthy credit habits
that underpin it) tells lenders you’re a reliable user of credit. You can expect
new credit card offers to include generous spending limits, and you should
also feel comfortable asking the lenders you already work with to increase
your limits as necessary. Doing so makes larger purchases possible, of
02
course, but it can also reduce your utilization, helping your credit scores
even more—as long as you continue to maintain low balances.
Lower interest rates
If you have an outstanding credit score, you’re more likely to
03
qualify for the lowest interest rates and best terms lenders offer,
which can mean big savings. For example, just 1 or 2 percentage
points less on your mortgage interest rate could save you tens of
thousands of dollars over the course of the loan.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 387 awesome benefits of a great credit score (continued)
The most rewarding credit cards
Excellent credit will help you qualify for credit cards with low interest
rates and other rewards including cash back offers, travel points and 04
other types of incentives.
Insurance discounts
Car insurance companies in many states factor in credit scores
05 when determining monthly premiums. You generally can’t be
denied insurance based on solely credit scores, but good credit
scores can help you qualify for lower insurance premiums.
More housing options
Landlords may use credit scores to screen tenants and gauge their
financial risk. A good credit score can increase your chances of getting
into a house or apartment and spare you from having to pay a higher
06
security deposit.
Reduced security deposits on utilities
If you are a new customer, utility companies may look at your credit
07 report to get a sense of how likely you are to pay your utility bills
on time. Having a good payment history and good credit scores will
reduce the chances they’ll charge you a security deposit when you
establish utility service.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 39How to get a top credit score
Once you get a feel for boosting your credit score, you may find yourself
drawn to the idea of achieving the ultimate FICO Score, a “perfect” 850. It can
be done, but before you embark on that quest, you should know there’s not much
practical advantage to doing that: If you consistently maintain a FICO Score of
800 or greater, lenders will view your credit as excellent, and you’ll be able to
take full advantage of the seven benefits mentioned on the previous two pages.
• Minimize outstanding balances. While experts • Keep all your credit card accounts active.
agree that keeping your revolving credit account All other factors being equal, credit scoring
balances well below 30% of your total borrowing models respond more favorably to active credit
limit can help your credit, the lower, the better. card accounts—those that are in use—than to
Those with exceptional credit scores typically identical accounts that lie dormant. This factor
keep balances below 10% of their overall doesn’t play a big enough role in scores for
spending limits, and most pay their credit account most credit users to worry about, but it can be a
balances in full every month. difference-maker on the edges.
• Send payments before they’re due. The 30-day • Set up automatic payments. A great way to
grace period for payments on most credit cards maintain activity without running up balances
means you pay no interest charges as long as you or interest charges is to make small, fixed
pay the full amount that appears on your account monthly payments with otherwise unused
statement each month. That said, you can pay off cards. These payments may be for your gym
outstanding balances before they even appear memberships, video-streaming accounts and
on your statements, and this can help your score. cable subscriptions. Many people pay these
Just ask your card issuers (or check the fine bills using automatic payments from their
print in your cardholder agreements) to find the checking accounts, and the trick is just to add a
monthly statement closing date for each card and step: Designate an unused card as the payment
plan on making payment in full by that date. Doing source for one of those fees, and then set up an
so gives you the benefit of activity on the card, but automatic checking payment through your bank
prevents even a temporary debt from being noted account to pay the credit card bill.
on your credit report.
It won’t happen overnight, but with improved credit habits and some strategic
adjustments to your outstanding balances and utilization rate, you can begin to see
steady score improvements within just a few months. With perseverance and patience,
an excellent FICO Score can be yours. Enjoy the journey.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 40MYTH
Closing unused credit
card accounts boosts
your credit score.
TRUTH:
Eliminating an account reduces your total borrowing limit and could
therefore increase your total credit utilization ratio—which could
lower your credit score.
If you use one of your credit cards less frequently than the others, you may wonder if you should
close the account. Keeping the account open—and using the card for a small purchase (like a
subscription) you pay off each month—can help your scores. So unless you’re paying annual
fees on cards you’re not using, there’s not usually a compelling need, or benefit, to close them.
If you still want to close dormant accounts, just know that doing so could reduce your total
borrowing limit while increasing your credit utilization ratio (the percentage of available credit
that you have used). If you use more than 30% of your available credit, you could experience a
significant drop in your scores.
You may be able to close accounts with low borrowing limits without jeopardizing your credit
score. But generally, it’s best not to close any cards prior to applying for a large loan, such as a
mortgage, since your scores could be affected.
A myth inside a myth
It’s widely and incorrectly believed that closing your oldest credit accounts can hurt your credit score by erasing part of your credit
history. That just isn’t so. Like paid-off car loans and mortgages, credit card accounts closed in good standing stay on your credit
report for 10 years after they’re closed, and the age of those accounts continues to benefit your credit score.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 41Takeaways The Ultimate Field Guide: Understanding and Improving Your Credit Score 42
Personal credit can help you reach your dreams, whether that’s an education, a home, a
car or even just the simple purchases that make life safer or a little more comfortable.
If you follow the guidelines in this credit field guide and stick to its rules of the road, your
journey will be more enjoyable, and you’ll make steady progress toward excellent credit.
Here are our top 4 tips to keep in mind:
Pay your bills on time faithfully, every month.
01 Use autopay, sticky notes, phone reminders or whatever else it
takes. Making this a lifelong habit will do more to help your credit
profile than any other action you can take.
Establish credit as early in your life as you can.
Consider becoming an authorized user on a credit card that belongs to a
parent or loved one, getting a cosigner to vouch for you on a loan, or putting
down a deposit to obtain a secured credit card. Your credit score will tend 02
to increase over time as you gain borrowing experience, and starting early
gives you a head start.
Watch your outstanding balances.
03 Keep your credit card balances as low as possible. Ideally, pay them off
every month and never let them exceed 30% of your credit limit.
Check credit reports and credit scores regularly—
but not obsessively.
Request credit reports from the three major credit bureaus at least once each
year to ensure accuracy and check for unauthorized activity in your name.
Checking your FICO Score or other credit score monthly is a good way to track
04
the progress of your credit behaviors—as long as you remember to look at the
numbers over the long haul and don’t panic about occasional dips.
The Ultimate Field Guide: Understanding and Improving Your Credit Score 43If you keep these tips in mind, improved credit scores and the opportunities they open up may be right around the corner. Enjoy the adventure!
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